A Theory of Conditionality

Abstract

Since the establishment of a new international economic order at the Bretton Woods conference in 1944, conditionality — that is, the linking of the disbursement of a loan to understandings concerning the economic policy which the government of the borrower country intends to pursue — has been an important component of the mechanism by which international financial institutions attempt to regulate the behaviour of the world economy. Since its foundation the International Monetary Fund (IMF) has attached policy conditions to its stand by loans, usually involving restriction of public expenditure and domestic credit expansion (Killick, 1984; Williamson, 1983); more recently, from the early 1980s onward, both the World Bank and bilateral donors have committed an increasing proportion of their resources to ‘policybased loans’ which are conditional on policy measures intended to build up the supply side of recipient economies. Over 70 per cent of the IMF’s lending, at least 30 per cent of the World Bank’s, and about 25 per cent of total OECD bilateral aid spending — some $20 billion annually — is devoted to conditional financial loan transfers (OECD, 1991).